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Money, Money, Money!

Money, Money, Money!

How is it possible that I can be so confident (some say silly) to afford giving away interest rates of 4% per annum to my parents when I pool funds together for investing in stocks?  Are there some uber secret techniques that I am using?  Or am I just plain crazy?  If it is true, then show me how to make MONEY, MONEY, MONEY!

Most folks do not realize the true returns and sources of revenues that a good stock is able to generate for you that does not require you breaking a sweat!  Here is the breakdown:

1. Capital Returns – Also refers to gain in share price.  This annual return is anywhere between 2% to 12% of purchase price in the Singapore markets.  Normally, the average benchmark for capital returns should be the same as the annual economy growth of Singapore.

2. Dividends – The average blue chip dividend should beat the average 2% fixed deposit interest rates of banks.  Else, most folks would rather put their money in banks than invest in companies.  Hence the annual return is approximately 2% to 7% of purchase price in Singapore.

3. Rental revenues– Most people did not know that they can rent out the shares they own.  However, the problem with this scheme offered by the Central Depository of Singapore (CDP) is that you need to hold at least 50,000 shares to participate.  However, the returns are very decent should anyone wants to borrow your shares.  It is currently priced at 4% of the prevailing price of your stock. So assuming that you manage to rent out your shares for only 3 months in an entire year, you could get about about 1% income.

So in a nutshell, if you stock is performing badly due to the market circumstance (and no fault of its own), you should be able to get at least 4% returns annually.  In a best case scenario where you could also rent out your stocks, you are possibly looking at returns of up to 20% per annum!

So if you pay out 4% interests to your parents in an average performing investment market, and assuming you are making 10% returns, you can effectively increase your returns by almost 6% using other people’s money!  This gives you a net return of 16% (if you include your own portion).

In the event that things do turn for the worse, and you do not make capital returns, the dividends and rental incomes can cushion the fall.  Hence this mindset of investing can allow you to take risks with good potential returns, but with controlled downside.

Hence, it is beginning to sound very true that money makes even more money!  Hence I do recommend kick-starting your efforts to raise capital to begin investment!

For those who are born after the ABBA hit song – “Money, Money, Money”, here is the video clip to inspire you…less the gambling Monaco part.

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Chicken RiceThere is no stock market ticker to tell you how much you should value your chicken rice.  Yet you can always sense when it is over-priced or under-priced.  Assume that there is a stall owner who happens to sell the world’s best chicken rice that you love to eat.  It’s tasty, delicious and everything you could ever ask for. 

Then suddenly, the nice owner realises that he could change his prices just to see how you would react.

  1. Price drops to 10 cents – You go hysterical!  You secretly plan to stock up a gazillion plates of your favourite dish.  The owner sees this and senses something amiss with you salivating in front of his stall.  He changes the price.
  2. Price rises to 6 million dollars– You go hysterical (in a bad way) again!  Your face turns black in anger and wonders how many folks can really afford it.  As you sulk, the owner realises that pricing his chicken rice to the same as his favourite TV show (6 million dollar man) is not going get him any customers.  He then changes the price again.
  3. Price returns to 3 dollars – You suppress all forms of ego to buy and consumer your dish.  You will continue to eat there even if the price fluctutes a little from time to time, depending on the situation. 

After all this, do you really know the actual value (not price) of chicken rice?  The reality is that you don’t.  Price changes, but the true value (or intrinsic value) remains rather constant.  Hence, there is always some general idea or feeling to tell if things are over priced, or under-priced, in relation to the actual value of the product.  The absolute value has too many variable affecting it and would be futile to try and find it.  By this, if the price is too far from the value, you should be able to detect it easily.

So what does this have to do with stock skills?  The main point is, we should never try and use all the prescribed methods/tools recommended by experts to determine the absolute true value of any stock prior to purchase.  Rather, these tools and methods should be used to tell us the general valuation range of a stock.  Then we can compare the current prices of stocks to tell if a stock is under-priced or over priced at any given point of time.

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